Another example of yield chasing

Just after a week since I posted a review of Superior Plus, declaring that they probably would have to reduce their dividends in order to be financially sustainable, they announced their quarterly results today. Notably, they lowered expectations for 2010 due to warmer weather (and therefore less natural gas deliveries).

They also had the following snippet in their quarterly release:

– The financial outlook for 2010 has been revised to AOCF per share of $1.50 to $1.65 as a result of lower than anticipated second quarter results and a weaker than previously anticipated economic recovery for the remainder of 2010.

– The financial outlook for 2011 has been revised to AOCF per share of $1.85 to $2.05 as a result of a weaker than previously anticipated economic recovery forecasted for the remainder of 2010 and throughout 2011, particularly impacting Superior’s Construction Products Distribution business.

AOCF is “Adjusted operating cash flow”, which is a non-GAAP metric to approximate how much cash before capital expenditures is available to the corporation. Since their dividend rate is $1.62/share, this leaves the company little to negative real cash to provide for acquisitions (which they have done plenty of over the past couple years), debt repayment or capital projects.

The company’s stock traded down 7.9% as a reaction to their disappointing report.

Investors undoubtedly will be looking at Superior Plus’s 13.03% dividend yield and marvel what a bargain they are getting, but it seems likely they will be forced to reduce dividends and this is reflected in the market price.

Interestingly enough, Superior Plus has four issues of debentures that trade on the TSX – the issue maturing in December 2012 has a yield to maturity of 4.5%, while the issue maturing July 2017 has a yield to maturity of 5.9%. They appear to be priced very expensive and I would not touch them.